Owning a property overseas allowed us to feel less anxious about not being on the property ladder here in Auckland but, with the current property market situation, we are very nervous at the thought of buying here.
We are wondering if there is a better option than buying a house and being stretched, trying to cover a huge mortgage, rates, etc, when we are currently (reasonably) happy to rent and are able to put away savings each week.
We could put the funds into our KiwiSaver accounts, knowing that those savings are being managed by people who know what they're doing and are growing — slowly but steadily. If we did this would we be able to draw on those funds for a deposit later on?
Other options may be to buy-to-rent somewhere outside Auckland, to purchase shares or to spread funds across several investments, but we just don't know where to start with that as we know absolutely nothing about shares and investments.
This is essentially our life savings so we really need to be clever with it, and certainly not make any decisions that could hurt us in the long term.
Any advice would be much appreciated.
Basically you're asking whether you can invest in something that will grow faster than Auckland house prices. The answer: nobody knows.
Sure house prices in the big city are worrying.
Even the Reserve Bank governor has expressed concern. But if you invest elsewhere and you want good growth you will probably need to go into shares or a share fund, and the share markets have also been growing fast in recent years. Both markets could perhaps be called bubbly.
As you mention, another option is buying a rental property outside Auckland.
That feels less risky, but there's also a chance the value will go nowhere much for a long time. And other investments, such as lower-risk managed funds, might also perform rather poorly, at current low interest rates.
In these situations it's best to look at where you want to end up, and in your case that seems to be in your own Auckland home at some point. So you might as well go ahead and buy now.
After all, if house prices fall, it shouldn't matter much because you can just stay in your home, or move to another Auckland home that will also be cheaper than it was.
I've lived through a few falling house price markets, and they always come right in time.
Sure, you'll be annoyed if there's a property plunge after you buy.
But you would also be annoyed if you watched your savings elsewhere decrease while property prices kept rising.
Accept that whatever you do you might regret and get on with the house search.
Apart from anything else, there are psychological advantages to owning your own home.
City rental v bach
The options I am considering are:
• Buy a rental in Auckland and sell in a few years (hoping for capital gain and the tenant pays the mortgage).
• Buy the beach property with a mortgage (renting out at peak times to assist with this).
• What would you suggest?
I would go for the second option. This is like the previous Q&A, in that you might as well go where you're aiming.
With your first option, rents these days are often not high enough to cover large mortgages, so you might have to put cash in along the way. And there might be no gain - there could even be a loss - when you sell. It's risky.
If you're hoping to get high rental income on your bach you might want to do some homework before buying. Check the rents being charged on an online booking site against the property prices in different locations.
One tip on renting out a bach: I'm told that if you charge somewhat below the market in your area you get a lot more takers and so a lot more money in the long run.
Saving for retirement
What is available in the market that would be a good option? I would prefer a plan that is "locked" within reason and is also not front-loaded with outrageous fees.
I suggest you take the following steps:
• Check the KiwiSaver Fund Finder on sorted.org.nz to see if you are in the most suitable fund for you. If not, shift. Just ask the new provider to move you.
• Decide whether you're happy to have your extra savings locked up until you reach NZ Super age.
• If yes, save the extra in KiwiSaver, by contributing directly to your provider. You could set up a regular automatic transfer from your bank account.
• But if you want the money to be more accessible, ask the provider if they have a similar non-KiwiSaver fund. Most do. Then set up regular contributions to that.
• Keep an eye on relative fees in the different funds, though. See the next Q&A.
Managed funds and fees
We are looking at managed funds and wonder what are the merits of investing in a managed fund (non-KiwiSaver) in comparison with a similar type of managed fund (KiwiSaver). The fees are a lot lower for the KiwiSaver scheme, so wouldn't the returns be higher?
This assumes that we won't need to access these funds until we reach 65.
The advantage of a non-KiwiSaver fund is that you can usually get the money out whenever you want to.
This is often important for people with several decades to go before retirement.
While you can withdraw KiwiSaver money if you get into serious financial difficulties or suffer from serious illness, you never know when you might want to access money for other reasons.
Family members might be in financial trouble, or you might want to invest in a relative's new business or help someone into their first home, or ...
At your stage in life, however, you'll have a better idea of those likely needs over the next 10 years. And there's also the possibility that someone would lend you money if needed, knowing that you could repay them fairly soon when you get access to your KiwiSaver savings.
So you might decide it's worth it to stick with saving in KiwiSaver so you can take advantage of lower fees.
You're quite right that - assuming two funds have similar investments - the one with lower fees is likely to have higher returns after fees.
Some fund managers argue that they charge higher fees because their superior management will bring in higher returns. But I'm yet to be convinced.
Let's look at the difference fees make. We'll say a KiwiSaver fund charges 0.8 per cent in fees while a similar non-KiwiSaver fund charges 1.3 per cent. The return on both funds before fees but after tax is 5 per cent.
Here are the balances after nine years of saving if you invest $5000 a month, and then stay in the fund through retirement, withdrawing money over 20 years.
• In the KiwiSaver fund, $657,100. You can then withdraw $4050 a month in retirement.
• In the non-KiwiSaver fund, $641,600. You can then withdraw $3800 a month. That extra $250 a month could add touches of luxury to your retirement. Or I'm sure a charity would love to receive it.
While we're at it, let's work through the numbers for those with a longer time horizon. We'll assume a deposit of $1000 a month. Here are the balances after 30 years of saving:
• In the KiwiSaver fund, $721,850. You can then withdraw $4450 a month.
• In the non-KiwiSaver fund, $660,142. You can then withdraw $3900 a month. Having $550 more a month to spend is a big deal.
In all these calculations, if you deposit half the amount per month, halve all the resulting numbers, and so on. All the numbers change proportionately.
Note that these same comparisons would also apply to two KiwiSaver funds with differing fees. For more on KiwiSaver fees see the KiwiSaver Fund Finder mentioned earlier.
Your views on advisers wanted by Govt
MBIE is consulting on areas to improve and clarify the Financial Advisers Act 2008 and the Financial Service Providers Act 2008.
As part of the review, we'd like to hear from New Zealanders about their experiences with financial advice. Some of the things we're interested in are:
• Where do people get financial advice from and why?
• What information do people need to have to choose an adviser?
• At what points in life do people feel like they need financial advice?
• What experiences have people had with financial advisers and once they get that advice, is it understandable?
• How can we promote confidence in financial advisers?
• And lastly, how can we facilitate access to advice in the future, especially with the growth of KiwiSaver and technology that facilitates new and faster ways of getting advice?
These questions and others can be found in the Issues Paper which is out for public consultation and can be found here: www.mbie.govt.nz/what-we-do/faareview.
We look forward to hearing your readers' views.
Iain Southall, manager, corporate law at the Ministry of Business, Innovation and Employment (MBIE)
Okay, everyone, here's your chance to tell the Government what's really going on out there in the world.
And the officials do listen. Whenever a government department is looking into an issue like this, they always hear plenty from people in the industry, who have associations set up partly for the purpose of lobbying the Government.
It's harder to get the perspective of Joe and Joanne Public. So every letter or submission from the consumer side is read with interest.
If you hold views on any of the questions listed above, send them to this column. I will publish some, and forward all of them to Iain Southall. The deadline for comments to MBIE is July 22.
Remember that letters to the column are meant to be no more than 200 words — although sometimes we let through 300 words or so. If you want to say more, your letter probably won't be published, but it will still go to Southall.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is maryholm.com. Her opinions are personal and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature and she is not responsible for any loss that any reader may suffer from following it. Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.